10-Q 1 cmw1611.htm QUARTERLY REPORT

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number 1-7007

BANDAG, INCORPORATED
(Exact name of registrant as specified in its charter)

Iowa
 42-0802143
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)


2905 North Highway 61, Muscatine, Iowa
 52761-5886
(Address of principal executive offices) (Zip Code)


(563) 262-1400
(Registrant's telephone number, including area code)


Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $1 par value, 9,132,475 shares as of July 29, 2005.
Class A Common Stock, $1 par value, 9,507,144shares as of July 29, 2005.
Class B Common Stock, $1 par value; 918,358 shares as of July 29, 2005.

BANDAG, INCORPORATED AND SUBSIDIARIES

INDEX

Part I: FINANCIAL INFORMATION Page No.

     Item 1.		 Financial Statements (Unaudited)

 		 Condensed consolidated balance sheets -
June 30, 2005 and December 31, 2004   3

 		 Condensed consolidated statements of operations
Three months ended June 30, 2005 and 2004
Six months ended June 30, 2005 and 2004   4

 		 Condensed consolidated statements of cash flows
Six months ended June 30, 2005 and 2004   5

 		 Notes to condensed consolidated financial statements
June 30, 2005   6

     Item 2.		 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11

     Item 3.		 Quantitative and Qualitative Disclosure about Market Risk 17

     Item 4.		 Controls and Procedures 17

PART II: OTHER INFORMATION

     Item 2.		 Unregistered Sales of Equity Securities and Use of Proceeds 18

     Item 4.		 Submission of Matters to a Vote of Security Holders 18

     Item 6.		 Exhibits 19

SIGNATURES		 20


2

PART I. FINANCIAL INFORMATION

BANDAG, INCORPORATED AND SUBSIDIARIES

Item 1. Financial Statements
Condensed Consolidated Balance Sheets

In thousands, except share data (Unaudited)
June 30,
2005
 December 31,
2004
Assets            
Current assets  
  Cash and cash equivalents   $ 65,875   $ 66,646  
  Investments    123,165    136,115  
  Accounts receivable, net    156,373    157,809  
  Inventories  
     Finished products    61,716    55,056  
     Material and work in process    17,992    14,836  
     79,708    69,892  
  Other current assets    55,102    55,793  
      Total current assets    480,223    486,255  

Property, plant, and equipment		    550,430    534,008  
Less accumulated depreciation and amortization    (365,495 )  (363,990 )
     184,935    170,018  

Intangible assets, net		    31,973    35,234  
Other assets    42,386    39,220  
        Total assets   $ 739,517   $ 730,727  

Liabilities and shareholders' equity		  
Current liabilities  
  Accounts payable   $ 43,528   $ 33,138  
  Accrued employee compensation and benefits    32,084    38,412  
  Accrued marketing expenses    26,038    28,288  
  Other accrued expenses    31,491    37,880  
  Income taxes payable    3,883    2,995  
  Short-term notes payable and current portion of other obligations    17,856    17,845  
      Total current liabilities    154,880    158,558  

Long-term debt and other obligations		    31,943    29,963  
Deferred income tax liabilities    8,174    7,502  
Minority interest    2,429    2,417  
Shareholders' equity  
  Common stock; $1.00 par value; authorized - 21,500,000 shares;  
     issued and outstanding - 9,133,050 shares in 2005, 9,117,212 shares in 2004    9,133    9,117  
  Class A common stock; $1.00 par value; authorized - 50,000,000 shares;  
     issued and outstanding - 9,503,757 shares in 2005, 9,416,058 shares in 2004    9,504    9,416  
  Class B common stock; $1.00 par value; authorized - 8,500,000 shares;  
     issued and outstanding - 918,358 shares in 2005, 918,591 shares in 2004    918    919  
  Additional paid-in capital    34,590    29,334  
  Retained earnings    516,846    513,152  
  Accumulated other comprehensive loss    (28,900 )  (29,651 )
      Total shareholders' equity    542,091    532,287  
        Total liabilities and shareholders' equity   $ 739,517   $ 730,727  

See notes to condensed consolidated financial statements.

3

BANDAG, INCORPORATED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Earnings

Three Months Ended
June 30,		 Six Months Ended
June 30,
In thousands, except per share data 2005
 2004
 2005
 2004
Income                    
Net sales   $ 227,261   $ 213,180   $ 417,017   $ 389,861  
Other    1,087    1,419    3,148    2,646  
     228,348    214,599    420,165    392,507  

Costs and expenses		  
Cost of products sold    147,558    136,128    273,304    251,284  
Engineering, selling, administrative, and other expenses    62,284    61,534    119,680    118,354  
     209,842    197,662    392,984    369,638  

Income from operations		    18,506    16,937    27,181    22,869  
Interest income    2,159    992    3,972    2,042  
Interest expense    (629 )  (557 )  (1,085 )  (1,119 )
Earnings before income taxes and minority interest    20,036    17,372    30,068    23,792  
Income taxes    7,029    5,341    11,222    7,684  
Minority interest    268    137    145    195  
Net earnings   $ 12,739   $ 11,894   $ 18,701   $ 15,913  

Earnings per share		  
  Basic   $ 0.66   $ 0.62   $ 0.96   $ 0.83  
  Diluted   $ 0.65   $ 0.60   $ 0.95   $ 0.81  

Comprehensive net earnings		   $ 12,578   $ 8,636   $ 19,452   $ 13,841  
Cash dividends declared per share   $ 0.330   $ 0.325   $ 0.660   $ 0.650  
Depreciation included in expense   $ 6,255   $ 5,628   $ 12,737   $ 11,238  
Weighted average shares outstanding:  
  Basic    19,426    19,299    19,409    19,275  
  Diluted    19,714    19,688    19,710    19,672  

See notes to condensed consolidated financial statements.




4

BANDAG, INCORPORATED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

Six Months Ended
June 30,
In thousands 2005
 2004
Operating Activities            
  Net earnings   $ 18,701   $ 15,913  
  Provision for depreciation    12,737    11,238  
  Decrease (increase) in operating assets and liabilities, net    (6,577 )  9,506  
      Net cash provided by operating activities    24,861    36,657  

Investing Activities		  
  Additions to property, plant, and equipment    (26,243 )  (12,857 )
  Purchases of investments    --    (12,501 )
  Maturities of investments    12,950    44,171  
  Divestitures of businesses    2,251    882  
  Acquisitions of businesses    --    (71,868 )
      Net cash used in investing activities    (11,042 )  (52,173 )

Financing Activities		  
  Principal payments on short-term notes payable and long-term obligations    (1,886 )  (760 )
  Cash dividends    (12,873 )  (12,567 )
  Purchases of Common Stock, Class A Common Stock and Class B Common Stock    (2,281 )  (2,348 )
  Stock options exercised    1,387    1,891  
      Net cash used in financing activities    (15,653 )  (13,784 )

Effect of exchange rate changes on cash and cash equivalents		    1,063    (1,234 )
  Decrease in cash and cash equivalents    (771 )  (30,534 )
Cash and cash equivalents at beginning of period    66,646    100,326  
      Cash and cash equivalents at end of period   $ 65,875   $ 69,792  

See notes to condensed consolidated financial statements.





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BANDAG, INCORPORATED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements – Unaudited

Note 1. Basis of Presentation

The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Note 2. Comprehensive Net Earnings

Comprehensive net earnings for the three and six month periods ended June 30 were as follows (in thousands):

Three Months Ended
June 30,		 Six Months Ended
June 30,
2005
 2004
 2005
 2004
Net earnings     $ 12,739   $ 11,894   $ 18,701   $ 15,913  
Other comprehensive income:  
   Foreign currency translation    (161 )  (3,258 )  751    (2,072 )
Comprehensive net earnings   $ 12,578   $ 8,636   $ 19,452   $ 13,841  

Note 3. Acquisitions

On June 10, 2004, Bandag’s Speedco, Inc. segment acquired the assets of six licensed locations, which were owned and operated by PM Express, Inc. Speedco paid approximately $15,609,000, net of cash acquired, for these assets. The Company recorded $5,194,000 of goodwill.

Note 4. Divestitures

During 2004, Bandag’s Tire Distribution Systems, Inc. (TDS) segment sold 19 locations. The assets of these locations consisted primarily of inventory and property, plant and equipment. These locations had net sales of $16,995,000 and $31,978,000 for the quarter and year-to-date periods ended June 30, 2004. The divested locations had earnings before income taxes and minority interest of $300,000 for the quarter ended June 30, 2004 and a loss on the same basis of $86,000 for the year-to-date period ended June 30, 2004.



6

BANDAG, INCORPORATED AND SUBSIDIARIES

Note 5. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

Three Months Ended
June 30,		 Six Months Ended
June 30,
2005
 2004
 2005
 2004
Numerator:                    
  Net earnings   $ 12,739   $ 11,894   $ 18,701   $ 15,913  

Denominator:		  
  Weighted-average shares - Basic    19,426    19,299    19,409    19,275  

  Effect of dilutive:		  
    Restricted stock    4    91    4    76  
    Stock options    284    298    297    321  
     288    389    301    397  

Weighted-average shares - Diluted		    19,714    19,688    19,710    19,672  

Earnings per share		  
    Basic   $ 0.66   $ 0.62   $ 0.96   $ 0.83  
    Diluted   $ 0.65   $ 0.60   $ 0.95   $ 0.81  

Note 6. Retirement Benefit Plans

Net periodic (benefit) cost for the three and six month periods ended June 30 is composed of the following (in thousands):

Three Months Ended
June 30,		 Six Months Ended
June 30,
2005
 2004
 2005
 2004
Pension Benefits                    
Service cost   $ 1,201   $ 1,059   $ 2,402   $ 2,117  
Interest cost    1,827    1,710    3,655    3,419  
Expected return on plan assets    (1,963 )  (1,813 )  (3,925 )  (3,626 )
Amortization of prior service cost    32    29    64    59  
Amortization of transitional assets    (56 )  (162 )  (112 )  (323 )
Recognized actuarial loss    289    298    577    596  
Net periodic cost   $ 1,330   $ 1,121   $ 2,661   $ 2,242  

Postretirement Benefits		  
Service cost   $ 56   $ 56   $ 113   $ 112  
Interest cost    98    98    196    196  
Amortization of prior service cost    1    1    2    2  
Recognized actuarial gain    (14 )  (14 )  (27 )  (27 )
Net periodic cost   $ 141   $ 141   $ 284   $ 283  

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BANDAG, INCORPORATED AND SUBSIDIARIES

Note 7. Reclassifications

Prior to June 30, 2005, the Company classified auction rate securities as part of cash and cash equivalents. The Company has determined that such securities ($123,165,000 at June 30, 2005) do not technically meet the Generally Accepted Accounting Principles definition of cash and therefore, now classifies these securities as investments. The December 31, 2004 balance of $136,115,000 has been reclassified in the accompanying Condensed Consolidated Balance Sheet to conform with this presentation. Certain other prior period amounts in the accompanying Condensed Consolidated Statement of Cash Flows have been reclassified to conform with this presentation.

Certain other prior year amounts have been reclassified to conform with the current year presentation.

Note 8. Operating Segment Information

The Company has three reportable operating segments: Traditional Business, TDS and Speedco. The Traditional Business manufactures precured tread rubber, equipment and supplies for retreading tires and operates on a worldwide basis. The operations of the Traditional Business segment are evaluated by worldwide geographic region. The Company’s operations located in the United States and Canada, together with Open Road Technologies (formerly Quality Design Systems), are integrated and managed as one unit, which is referred to internally as North America. The Company’s operations located in Europe principally service European countries, but also export to certain other countries in the Middle East and Northern and Central Africa. This collection of countries is under one management group and is referred to internally as EMEA. The Company’s exports from North America to markets in the Caribbean, Central America, South America and Asia, along with operations in Brazil, Mexico, Venezuela, South Africa, and royalties from a licensee in Australia, are combined under one management group referred to internally as International.

TDS operates franchised retreading locations and commercial, retail, and wholesale outlets in the western region of the United States for the sale and maintenance of new and retread tires to principally commercial and industrial customers.

Speedco provides quick-service truck lubrication and routine tire services through company-owned on-highway locations in the United States.

Other consists of corporate administrative expenses, net unrealized foreign exchange gains and losses on U.S. denominated investments, interest income and interest expense.

The Company evaluates performance and allocates resources based primarily on profit or loss before interest and income taxes. Intersegment and intrasegment sales and transfers are recorded at fair market value less a discount between geographic areas within the Traditional Business. Transactions between the Traditional Business and TDS and between the Traditional Business and Speedco are recorded at a value consistent with that to unaffiliated customers.




8

BANDAG, INCORPORATED AND SUBSIDIARIES

For the three months ended June 30 (in thousands):

Traditional Business
North America EMEA International
2005 2004 2005 2004 2005 2004
Sales by Product                            
   Retread products   $ 100,517   $ 86,606   $ 20,055   $ 18,676   $ 31,425   $ 25,343  
   New tires    --    --    --    --    --    --  
   Retread tires    --    --    --    --    --    --  
   Equipment    3,493    5,040    1,324    898    527    305  
   Other    6,422    10,988    --    --    --    --  
Net sales to unaffiliated customers   $ 110,432   $ 102,634   $ 21,379   $ 19,574   $ 31,952   $ 25,648  

Transfers		   $ 7,092   $ 9,475   $ 211   $ 186   $ 1,683   $ 1,171  

Operating earnings (loss)		   $ 14,974   $ 16,176   $ 273   $ (1,664 ) $ 3,445   $ 2,874  
Interest income    --    --    --    --    --    --  
Interest expense    --    --    --    --    --    --  
Earnings (loss) before income taxes &  
minority interest   $ 14,974   $ 16,176   $ 273   $ (1,664 ) $ 3,445   $ 2,874  
 
TDS
 Speedco
 Other
2005 2004 2005 2004 2005 2004
Sales by Product  
   Retread products   $ --   $ --   $ --   $ --   $ --   $ --  
   New tires    25,049    27,827    548    40    --    --  
   Retread tires    7,386    11,997    65    --    --    --  
   Equipment    --    --    --    --    --    --  
   Other    10,486    11,113    19,964    14,347    --    --  
Net sales to unaffiliated customers   $ 42,921   $ 50,937   $ 20,577   $ 14,387   $ --   $ --  

Transfers		   $ 79   $ 390   $ --   $ --   $ --   $ --  

Operating earnings (loss)		   $ 2,670   $ (34 ) $ 838   $ 1,754   $ (3,694 ) $ (2,169 )
Interest income    --    --    --    --    2,159    992  
Interest expense    --    --    --    --    (629 )  (557 )
Earnings (loss) before income taxes &  
minority interest   $ 2,670   $ (34 ) $ 838   $ 1,754   $ (2,164 ) $ (1,734 )

Consolidated

 		 2005 2004
Sales by Product                            
   Retread products   $ 151,997   $ 130,625                  
   New tires    25,597    27,867                  
   Retread tires    7,451    11,997                  
   Equipment    5,344    6,243                  
   Other    36,872    36,448                  
Net sales to unaffiliated customers   $ 227,261    213,180                  

Transfers		   $ 9,065   $ 11,222                  

Operating earnings (loss)		   $ 18,506   $ 16,937                  
Interest income    2,159    992                  
Interest expense    (629 )  (557 )                
Earnings (loss) before income taxes &  
minority interest   $ 20,036   $ 17,372                  

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BANDAG, INCORPORATED AND SUBSIDIARIES

For the six months ended June 30 (in thousands):

Traditional Business
North America EMEA International
2005 2004 2005 2004 2005 2004
Sales by Product                            
   Retread products   $ 180,331   $ 157,056   $ 38,595   $ 39,195   $ 59,702   $ 47,529  
   New tires    --    --    --    --    --    --  
   Retread tires    --    --    --    --    --    --  
   Equipment    7,433    9,296    2,173    1,575    1,119    562  
   Other    13,938    21,651    --    --    --    --  
Net sales to unaffiliated customers   $ 201,702   $ 188,003   $ 40,768   $ 40,770   $ 60,821   $ 48,091  

Transfers		   $ 13,710   $ 19,951   $ 434   $ 312   $ 2,899   $ 2,266  

Operating earnings (loss)		   $ 23,579   $ 21,630   $ 1,194   $ 26   $ 6,884   $ 5,913  
Interest income    --    --    --    --    --    --  
Interest expense    --    --    --    --    --    --  
Earnings (loss) before income taxes &  
minority interest   $ 23,579   $ 21,630   $ 1,194   $ 26   $ 6,884   $ 5,913  
 
TDS
 Speedco
 Other
2005 2004 2005 2004 2005 2004
Sales by Product  
   Retread products   $ --   $ --   $ --   $ --   $ --   $ --  
   New tires    42,475    49,486    777    40    --    --  
   Retread tires    13,637    21,857    93    --    --    --  
   Equipment    --    --    --    --    --    --  
   Other    19,486    20,533    37,258    21,081    --    --  
Net sales to unaffiliated customers   $ 75,598   $ 91,876   $ 38,128   $ 21,121   $ --   $ --  

Transfers		   $ 215   $ 777   $ --   $ --   $ --   $ --  

Operating earnings (loss)		   $ 1,573   $ (2,875 ) $ 1,637   $ 2,657   $ (7,686 ) $ (4,482 )
Interest income    --    --    --    --    3,972    2,042  
Interest expense    --    --    --    --    (1,085 )  (1,119 )
Earnings (loss) before income taxes &  
minority interest   $ 1,573   $ (2,875 ) $ 1,637   $ 2,657   $ (4,799 ) $ (3,559 )

Consolidated

 		 2005 2004
Sales by Product                            
   Retread products   $ 278,628   $ 243,780                  
   New tires    43,252    49,526                  
   Retread tires    13,730    21,857                  
   Equipment    10,725    11,433                  
   Other    70,682    63,265                  
Net sales to unaffiliated customers   $ 417,017   $ 389,861                  

Transfers		   $ 17,258   $ 23,306                  

Operating earnings (loss)		   $ 27,181   $ 22,869                  
Interest income    3,972    2,042                  
Interest expense    (1,085 )  (1,119 )                
Earnings (loss) before income taxes &  
minority interest   $ 30,068   $ 23,792                  

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BANDAG, INCORPORATED AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

GENERAL

Results include the Company’s three reportable operating segments – its Traditional Business, TDS and Speedco.

  Sale of South Africa Operations

Effective December 1, 2004, the Company sold the business of Bandag in South Africa. Due to the foreign operations reporting on a one month lag, this transaction was recorded in 2005. These operations represented less than 2% of net sales and total assets of the Company and contributed approximately $1,500,000 to pre-tax income in 2004. The purchase price of approximately $3,500,000 consisted of a cash payment of $2,251,000 with the remainder to be paid in equal installments over five years. The actual payment in U.S. Dollars will depend on the currency fluctuations of the Euro and the South African Rand over the five year period. In relation to the installment payments, Bandag is considered the “Primary Beneficiary” under FASB Interpretation No. 46, revised December 2003 (FIN 46R), “Consolidation of Variable Interest Entities”. Under the guidance of FIN 46R Bandag will continue to consolidate the South African operations in its financial statements as long as Bandag is considered to be the Primary Beneficiary. Although the determination of Bandag as the Primary Beneficiary could change based on changes in the capitalization of the South African operations, based on the current facts, Bandag would be considered the Primary Beneficiary until final payment has been made. As a result, Bandag must defer recognition of the expected net loss of approximately $14,000,000 to $17,000,000, or approximately $0.70 to $0.90 diluted earnings per share, until the earlier of final payment of the five year obligation, which is expected to be December 1, 2009, or until it is no longer considered the Primary Beneficiary within the meaning of FIN 46R. The expected loss may fluctuate over the five-year period depending on the stability of the Euro and the South African Rand. The expected loss is primarily due to the cumulative translation adjustment of approximately $14,000,000 that is recorded in the Bandag Consolidated Balance Sheet related to the South African operation. The expected loss will not affect Bandag’s cash flow, but rather will be an accounting entry which will reduce net earnings.

  Net Sales

Consolidated net sales for the quarter and year-to-date periods ended June 30, 2005 increased $14,081,000 and $27,156,000, or 7%, from the prior year periods, respectively, on a 1% and 2% increase in retread unit volume in the Traditional Business, respectively. Net sales were positively impacted by an increase in Speedco net sales of $6,190,000 and $17,007,000 for the quarter and year-to-date periods ended June 30, 2005, respectively. Speedco sales for the year-to-date period ended June 30, 2004 are included from February 13, 2004, the date Bandag acquired an 87.5% majority interest in Speedco. Net sales were also positively impacted by $4,919,000 and $9,159,000 for the quarter and year-to-date periods ended June 30, 2005, respectively, due to the effect of translating foreign currency denominated results to U.S. dollars. The increase in net sales was partially offset by a decrease in TDS net sales of $8,016,000 and $16,278,000, or 16% and 18%, for the quarter and year-to-date periods ended June 30, 2005, respectively, reflecting the divestitures during 2004. The Company’s seasonal sales pattern is tied to the overall performance of the economy and to the level of trucking activity.

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BANDAG, INCORPORATED AND SUBSIDIARIES

  Gross Profit Margins

Consolidated gross profit margin for the quarter and year-to-date periods ended June 30, 2005 declined 1.1 percentage points from the prior year periods. Traditional Business gross profit margin decreased 2.1 and 2.4 percentage points for the quarter and year-to-date periods ended June 30, 2005, respectively, from the prior year periods. The decrease in Traditional Business gross profit margin is primarily due to lower than anticipated gross margin on fleet contract business.

  Operating and Other Expenses

Consolidated operating and other expenses increased $750,000 and $1,326,000, or 1%, for the quarter and year-to-date periods ended June 30, 2005, respectively, from the prior year periods. The increase in consolidated operating and other expenses was substantially impacted by expenses related to the Speedco operations, offset by the divestiture-related decrease at TDS. Other segment operating and other expenses increased $1,525,000 and $3,204,000 for the quarter and year-to-date periods ended June 30, 2005, respectively, from the prior year periods, primarily due to net foreign exchange gains and losses on U.S. denominated investments.

  Interest Income

Consolidated interest income increased $1,167,000 and $1,930,000 for the quarter and year-to-date periods ended June 30, 2005, respectively, from the prior year periods, primarily due to an increase in cash, investments and interest rates.

  Income Taxes

The effective tax rate increased to 35.1% for the quarter ended June 30, 2005, from 30.7% in 2004. The lower effective tax rate in 2004 was largely attributable to a $1,000,000 favorable tax adjustment in second quarter 2004, resulting primarily from the reassessment of certain tax matters.

  Net Earnings

Consolidated net earnings increased $845,000 and $2,788,000 for the quarter and year-to-date periods ended June 30, 2005, respectively, as compared to the prior year periods. Consolidated net earnings were $12,739,000 and $18,701,000, or $0.65 and $0.95 per diluted share, for the quarter and year-to-date periods ended June 30, 2005, respectively, compared to consolidated net earnings of $11,894,000 and $15,913,000, or $0.60 and $0.81 per diluted share, for the quarter and year-to-date periods ended June 30, 2004, respectively. Consolidated net earnings for the quarter and year-to-date period ended June 30, 2004 included a favorable tax adjustment of $1,000,000, or $0.05 per diluted share, resulting primarily from the reassessment of certain tax matters.


12

BANDAG, INCORPORATED AND SUBSIDIARIES

TRADITIONAL BUSINESS

  North America

The Company’s Traditional Business operations located in the United States and Canada, together with Open Road Technologies (formerly Quality Design Systems), are integrated and managed as one unit, which is referred to internally as North America. North America sells to independent dealers as well as to TDS and other subsidiaries. Sales to TDS and other subsidiaries are eliminated in consolidation. Accordingly, as TDS locations are divested and become unaffiliated Bandag customers, sales to independent dealers will benefit.

The table below depicts the breakout of North America’s retread product sales to TDS and to independent dealers.

(in thousands) Three Months Ended
June 30,		 Six Months Ended
June 30,
Retread Product Sales 2005
 2004
 Increase
(Decrease)
 2005
 2004
 Increase
(Decrease)

Sales to Independent Dealers		     $ 100,517   $ 86,606    16.1 % $ 180,331   $ 157,056    14.8 %
Sales to TDS    4,021    6,347    (36.6 )%  7,357    11,950    (38.4 )%
Total Retread Product Sales   $ 104,538   $ 92,953    12.5 % $ 187,688   $ 169,006    11.1 %

The increase in retread product sales to independent dealers is due to several factors including, price increases in December 2004 and May 2005, increased retread material unit volume, increased sales to independent dealers that purchased TDS locations, and the positive effect of translating Canadian dollar foreign currency denominated results to U.S. dollars of $1,078,000 and $1,759,000 for the quarter and year-to-date periods ended June 30, 2005, respectively. Retread product sales were positively impacted by a 5% increase in retread material unit volume for the quarter and year-to-date periods ended June 30, 2005. Retread product sales increased at a higher rate than the unit volume increased due to the impact of price increases in December 2004 and May 2005. The decrease in retread product sales to TDS is primarily due to the divestitures and closures of TDS locations.

Lower than anticipated gross margin on fleet contract business primarily resulted in a 2.1 and 2.5 percentage point decrease in North America’s gross margin for the quarter and year-to-date periods ended June 30, 2005 from the prior year periods, respectively.

Operating and other expenses increased $145,000, or 1%, for the quarter ended June 30, 2005 from the prior year period. Operating and other expenses decreased $4,154,000, or 7%, for the year-to-date period ended June 30, 2005 from the prior year period. The decrease in operating and other expenses for the year-to-date period ended June 30, 2005 is primarily due to the a decrease in reserves for insurance and an increase in net foreign exchange gains.

Lower gross profit margin primarily resulted in a decrease for North America of $1,202,000 in earnings before income taxes and minority interest for the quarter ended June 30, 2005, as compared to the prior year period. Lower operating expenses primarily resulted in an increase of $1,949,000 in earnings before income taxes and minority interest for the year-to-date period ended June 30, 2005, as compared to the prior year period.


13

BANDAG, INCORPORATED AND SUBSIDIARIES

  EMEA

The Company’s operations located in Europe principally service markets in European countries, but also export to certain other countries in the Middle East and Northern and Central Africa. This collection of countries is under one management group and is referred to internally as EMEA. Net sales in EMEA increased $1,805,000, or 9%, for the quarter ended June 30, 2005, from the prior year period on a ten percent decrease in retread material unit volume. Net sales remained relatively even for the year-to-date period ended June 30, 2005 as compared to the prior year period on a 14% decrease in retread material unit volume. Retread material unit volume and net sales for the quarter and year-to-date periods ended June 30, 2005, were negatively impacted by the loss of several dealers during 2004. Net sales in EMEA in the quarter and year-to-date periods ended June 30, 2005 were positively impacted by a September 2004 price increase and by $1,009,000 and $2,324,000, respectively, due to the effect of translating foreign currency denominated results to U.S. dollars. Gross margin increased 7.0 and 5.4 percentage points for the quarter and year-to-date periods ended June 30, 2005 compared to the prior year periods, respectively. Gross margin was positively impacted by decreases in manufacturing costs.

Operating and other expenses remained relatively flat for the quarter ended June 30, 2005 as compared to the prior year period. Operating and other expenses increased $904,000, or 6%, for the year-to-date period ended June 30, 2005 as compared to the prior year period. The increase in operating and other expenses for the year-to-date period ended June 30, 2005 was primarily due to the effect of translating foreign currency denominated results to U.S. dollars.

Higher gross margin primarily resulted in earnings before income taxes and minority interest for EMEA of $273,000 for the quarter ended June 30, 2005 compared to a loss of $1,664,000, on the same basis, for the prior year period. EMEA’s earnings before income taxes and minority interest for the year-to-date period ended June 30, 2005 was $1,194,000 as compared to $26,000 for the prior year period.

  International

The Company’s exports from North America to markets in the Caribbean, Central America, South America and Asia, along with operations in Brazil, Mexico, Venezuela, South Africa, and royalties from a licensee in Australia, are combined under one management group referred to internally as International. Net sales in International for the quarter and year-to-date periods ended June 30, 2005 increased $6,304,000 and $12,730,000, or 25% and 26%, from the prior year periods, respectively. Retread material unit volume decreased 2% for the quarter ended June 30, 2005 as compared to the prior year period. Retread material unit volume increased 2% for the year-to-date period ended June 30, 2005 from the prior year period. Net sales in International for the quarter and year-to-date periods ended June 30, 2005 were positively impacted by price increases and by $2,832,000 and $5,076,000, respectively, due to the effect of translating foreign currency denominated results to U.S. dollars. Gross margin for the quarter and year-to-date periods ended June 30, 2005 decreased 1.9 and 2.2 percentage points from the prior year periods, respectively, primarily due to higher raw material prices.


14

BANDAG, INCORPORATED AND SUBSIDIARIES

Operating and other expenses for the quarter and year-to-date periods ended June 30, 2005 increased $1,183,000 and $2,417,000, or 19% and 22%, from the prior year periods, respectively. Operating and other expenses for the quarter-to-date period ended June 30, 2005 were negatively impacted by the effect of translating foreign currency denominated results to U.S. dollars.

Earnings before income taxes and minority interest for the quarter and year-to-date periods ended June 30, 2005 increased $571,000 and $971,000 from the prior year periods, respectively, primarily due to the increase in net sales.

TIRE DISTRIBUTION SYSTEMS, INC.

TDS net sales for the quarter and year-to-date periods ended June 30, 2005 decreased $8,016,000 and $16,278,000, or 16% and 18%, from the prior year periods, respectively, primarily due to the divestitures of TDS locations in 2004. TDS net sales were positively impacted by higher prices and an increase in service revenue and new tire sales.

The divested locations had net sales of $16,995,000 and $31,978,000 for the quarter and year-to-date periods ended June 30, 2004. The divested locations had earnings before income taxes and minority interest of $300,000 for the quarter ended June 30, 2004 and a loss on the same basis of $86,000 for the year-to-date period ended June 30, 2004.

Gross margin for the quarter and year-to-date periods ended June 30, 2005 increased 0.5 and 1.9 percentage points from the prior year periods, respectively, primarily due to higher selling prices and increased service revenue, which has higher margins. Operating and other expenses decreased $4,532,000 and $7,122,000, or 35% and 27%, for the quarter and year-to-date periods ended June 30, 2005, respectively, primarily due to the divestitures in 2004. Operating and other expenses for the quarter and year-to-date periods ended June 30, 2005 were positively impacted by a decrease in reserves for insurance.

TDS recorded earnings before income taxes and minority interest of $2,670,000 and $1,573,000 for the quarter and year-to-date periods ended June 30, 2005, respectively, as compared to a loss on the same basis of $34,000 and $2,875,000 for the prior year periods, respectively.

SPEEDCO, INC.

The net sales of Speedco, which was acquired February 13, 2004, and its six licensees which were acquired June 10, 2004, for the quarter and year-to-date periods ended June 30, 2005 increased $6,190,000 and $17,007,000, or 43% and 81%, from the prior year periods, respectively. The increase in net sales is primarily due to the acquisition of the six licensed locations, an increase in volume at existing locations, the addition of three new facilities and the installation of tire lanes at nine existing locations. Operating and other expenses increased $2,445,000 and $6,077,000 for the quarter and year-to-date periods ended June 30, 2005, respectively, primarily due to the expenses associated with the expansion of additional Speedco locations. Speedco recorded earnings before income taxes and minority interest of $838,000 and $1,637,000 for the quarter and year-to-date periods ended June 30, 2005, respectively, as compared to $1,754,000 and $2,657,000 for the prior year periods, respectively.


15

BANDAG, INCORPORATED AND SUBSIDIARIES

OTHER

The Company’s Other segment consists of corporate expenses, interest income on invested cash balances and interest expense on long-term and short-term debt. Corporate expenses increased $1,525,000 and $3,204,000 for the quarter and year-to-date periods ended June 30, 2005, respectively, from the prior year periods, primarily due to net foreign exchange gains and losses on U.S. denominated investments. Interest income was positively impacted by higher cash and investment balances and higher interest rates.

Financial Condition:

Liquidity

Prior to June 30, 2005, the Company classified auction rate securities as part of cash and cash equivalents. The Company has determined that such securities ($123,165,000 at June 30, 2005) do not technically meet the Generally Accepted Accounting Principles definition of cash and therefore, now classifies these securities as investments. The December 31, 2004 balance of $136,115,000 has been reclassified in the accompanying Condensed Consolidated Balance Sheet to conform with this presentation. Certain other prior period amounts in the accompanying Condensed Consolidated Statement of Cash Flows have been reclassified to conform with this presentation. At June 30, 2005, the Company had cash and cash equivalents of $65,875,000, as compared to $66,646,000 at December 31, 2004. At June 30, 2005, the Company had investments of $123,165,000, as compared to $136,115,000 at December 31, 2004. The Company’s ratio of total current assets to total current liabilities was 3.1 to 1 at June 30, 2005 with current assets exceeding current liabilities by $325,343,000. At June 30, 2005, the Company had approximately $101,343,000 in borrowing capacity available under unused lines of credit. The Company believes it has an adequate cash balance for future cash flow needs.

Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2005 was $24,861,000, primarily due to net earnings adjusted for the noncash depreciation expense. At June 30, 2005, the Company had a net decrease in operating assets and liabilities of $6,577,000 compared to an increase of $9,506,000 for the prior year period. The net decrease in operating assets and liabilities at June 30, 2005 is primarily due to an increase in accounts receivable compared to a decrease for the prior year period.

Investing Activities

The Company spent $26,243,000 on capital expenditures through June 30, 2005, compared to $12,857,000 spent for the same period last year. The increase in capital expenditures is primarily due to expenditures made by Speedco for new facilities and installations of quick-service tire lanes at existing facilities. The Company typically funds its capital expenditures from operating cash flows.


16

BANDAG, INCORPORATED AND SUBSIDIARIES

The Company’s excess funds are invested in financial instruments with various maturities, but only instruments available-for-sale with an original maturity date of over 90 days and auction rate securities are classified as investments for balance sheet purposes. The Company’s maturities of investments exceeded purchases by $12,950,000 during the six months ended June 30, 2005, resulting in total investments of $123,165,000 as of June 30, 2005.

Financing Activities

Cash dividends totaled $12,873,000 for the six months ended June 30, 2005, compared to $12,567,000 for the same period last year. Cash dividends declared per share were $0.66 for the six months ended June 30, 2005, compared to $0.65 per share for the same period last year.

During the six month period ended June 30, 2005, the Company purchased 55,956 shares of Common Stock and Class A Common Stock at an average price of $40.76 per share, as compared to the purchase of 62,698 shares of Common Stock and Class A Common Stock at an average price of $37.44 per share for the same period last year.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

See the Company’s most recent Annual Report filed on Form 10-K (Item 7A). There has been no material change in this information.

Item 4. Controls and Procedures

Based on an evaluation performed by the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2005.

On May 1, 2005, the Company’s North American business unit converted the general ledger system to PeopleSoft. The PeopleSoft system is an enterprise resource planning system, the implementation of which, management believes, will add more system controls to the financial processes which should assist in improving the overall controls. Management is taking the necessary steps to monitor and maintain appropriate internal controls during this period of change. These steps include testing before implementation, implementing reviews to ensure the accuracy of the data and processes, and performing multiple levels of analysis. Based on an evaluation performed by the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, other than as described above, there were no changes in the Company’s internal control over financial reporting identified in such evaluation that occurred during the quarter ended June 30, 2005 that has materially affected, or is likely to materially affect, the Company’s internal control over financial reporting.


17

PART II. OTHER INFORMATION

BANDAG, INCORPORATED AND SUBSIDIARIES

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities(1)

April 1, 2005 -
June 30, 2005



 
 Total
Number
of Shares
Purchased

 
 Average
Price Paid
per Share


 
 Total Number
of Shares
Purchased as
Part of Publicly
Announced
Programs
 Maximum
Number of
Shares that May
Yet be Purchased
Under the
Program
Common Stock                    
April 1 - April 30    522   $ 45.22    522    909,988  
May 1 - May 31    492   $ 45.60    492    891,096  
June 1 - June 30    --    --    --    --  
   Total    1,014   $ 45.40    1,014    871,857 (1)(2)
Class A Common Stock  
April 1 - April 30    6,039   $ 41.00    6,039    909,988  
May 1 - May 31    18,400   $ 39.56    18,400    891,096  
June 1 - June 30    19,239   $ 40.46    19,239    871,857  
   Total    43,678   $ 40.16    43,678    871,857 (1)(2)

(1) On May 2, 2000, the Board of Directors approved a stock purchase program which authorized the purchase of up to 2,000,000 shares of outstanding Common Stock, Class A Common Stock, and/or Class B Common Stock in the open market or in private transactions. The program has no stated expiration date. No stock purchase program expired during the period covered by the above table.

(2) Represents the total number of shares of Common Stock, Class A Common Stock and/or Class B common Stock remaining to be purchased under the stock purchase program.

Item 4 – Submission of Matters to a Vote of Security Holders

(a) The Annual Meeting of the shareholders was held on May 3, 2005.

(b) The following directors were elected for three-year terms expiring in 2008:

  Martin G. Carver
Amy P. Hutton
Edgar D. Jannotta



18

PART II. OTHER INFORMATION

BANDAG, INCORPORATED AND SUBSIDIARIES

  In addition to the above directors, the following directors continued as directors for terms expiring as shown below

Name Term Expires
Robert T. Blanchard 2006
Gary E. Dewel 2006
R. Stephen Newman 2006
Roy J. Carver, Jr 2007
James R. Everline 2007
Phillip J. Hanrahan 2007

(c) Two matters were voted upon at the annual meeting. First, the following three nominees, all of whom were incumbent directors, were elected as directors for a three-year term ending in 2008 by the following vote:

Name Votes For Votes Withheld
Martin G. Carver 17,366,758 193,932
Amy P. Hutton 17,495,433   65,257
Edgar D. Jannotta 17,070,749 489,941

        Shareholders also voted upon a proposal to ratify the selection of Ernst & Young LLP as independent auditors of the Company for the year ending December 31, 2005. The shareholders ratified the selection by the following vote:

Votes For Votes Against Abstention
17,524,386 26,619 9,685

Item 6 — Exhibits

  31.1 Certification of Chief Executive Officer
  31.2 Certification of Chief Financial Officer
  32.1 Written Statement of the Chairman of the Board, Chief Executive Officer and President of Bandag, Incorporated Pursuant to 18 U.S.C.ss.1350
  32.2 Written Statement of the Vice President, Chief Financial Officer and Secretary of Bandag, Incorporated Pursuant to 18 U.S.C. §1350



19

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BANDAG, INCORPORATED  
      (Registrant)


Date:		 August 4, 2005 /s/ Martin G. Carver
Martin G. Carver
Chairman and Chief Executive Officer


Date:		 August 4, 2005 /s/ Warren W. Heidbreder
Warren W. Heidbreder
Vice President, Chief Financial Officer










20

Exhibit Index

Exhibit
Number 		Exhibit

31.1 Certification of Chief Executive Officer

31.2 Certification of Chief Financial Officer

32.1 Written Statement of the Chairman of the Board, Chief Executive Officer and President of Bandag, Incorporated Pursuant to 18 U.S.C.ss.1350

32.2 Written Statement of the Vice President, Chief Financial Officer and Secretary of Bandag, Incorporated Pursuant to 18 U.S.C.ss.1350